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Fiddling as Your Wealth Burns

Why doing nothing usually wins.

Get a load of these results of a recent survey of 1,000 investors by investment firm Edward Jones: 90% of Americans plan to make changes to their savings and investment strategies over the next six months. Why? The presidential election is the most-cited reason. Just 5% plan on staying the course over the next six months.

You know this is going to end badly.

Yes, the survey results are suspiciously askew. Surveys can be flawed. And some investors may say one thing but do another. But it's worth asking how changing investing strategies because of a presidential election has worked in the past.

We have plenty of examples.

During the 1996 election, market commentators recommended following a time-tested trend. "Investors would be wise to adjust their portfolios, depending on who wins the presidency in November," TheNews Tribune wrote that year. It continued:

Studies have shown that small stocks usually fare better under Democratic administrations and bigger stocks fare better under the Republicans. Research by Tacoma's Frank Russell Co. and Liberty Financial Cos. of Boston has drawn the same conclusion. So, the message is clear: If Bill Clinton wins, think small; if Bob Dole wins, think big.

How'd it work? In the four years following President Clinton's win, small-cap stocks underperformed large caps by more than half. In the succeeding eight years of Republican President George W. Bush's time in office, small-cap stocks outperformed by a factor of two. Anyone following the advisors' strategy would have dramatically underperformed a broad index for more than a decade -- and that's before trading fees.

It gets worse from there.

During the 2000 presidential election, Newsweek wrote that a win by George W. Bush and the ensuing tax changes could "help banks, brokers and other investment firms." By the end of Bush's second term, the KBW Bank Index had dropped almost 80%.

Another analyst from The Money Channel gave a bullish endorsement of airline stocks if Bush won the election, noting that "a broad tax cut ... has the tendency to increase discretionary spending." By 2005, four of the six largest U.S. airlines were in bankruptcy.

"There's an [easy] way to put your money on the November contest: buy some stocks," another Newsweek article counseled before the 2000 election. "The U.S. stock market hasn't lost money in a presidential-election year since 1940." But then it did in two of the next three election years.

Analysts lined up in 2008 to offer their recommendations before election day. Mad Money's Jim Cramer wrote: "An Obama victory would also be good for solar and wind power. My No. 1 solar pick would be First Solar [(Nasdaq: FSLR)], the only company in the field with a product that's commercially viable." The bulk of solar stocks have since collapsed, with First Solar down 93%.

If Obama won, Cramer went on to caution, "because of all the negative rhetoric, you'd have to trim both the major oils, like ExxonMobil [(NYSE: XOM)] and Chevron [(NYSE: CVX)], and the big drillers, like Schlumberger [(NYSE: SLB)] and Transocean [(NYSE: RIG)]." A basket of the four has gained more than 60% since Obama took office.

He wasn't alone. The idea that an Obama presidency would be a boon to green energy and a strike to big oil was nearly universal. Reality, as it has a tendency of doing, has proven quite the opposite.

You can go on and on. When it comes to presidential elections and your investments, there's only one constant: Those who make specific predictions about the effects of policy tend to lose.

None of this should be surprising. Political scientist Anthony Downs once noted that "politicians don't get elected to formulate policy; they formulate policy to get elected." That's a polite way of saying that politicians will say anything to get elected, and then avoid the hard stuff once in office. We have no idea what either candidate might actually do over the next four years if elected, regardless of what they campaign on today. Even if we did know what policies the next president might enact, we don't know how other business forces might affect certain industries (see: solar in 2010), or whether valuations render those industries poor investments despite the boost of a favorable president (see: pharmaceuticals last decade). The odds are overwhelming that the most important business stories of the next decade will have little to nothing to do with any policy either candidate could enact.

What should you be doing rather than fiddling with a new strategy before the election? Nothing different from the usual. If you're one of the 90% of investors planning to change your investment strategy based on the election, stop and take a good look at reality, your priorities, and your abilities. You couldn't see the future before the last election. You can't see it today.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.